Economic SYNOPSES short essays and reports on the economic issues of the day

2013 I Number 17

Translating Kurzarbeit

Silvio Contessi, Economist Li Li, Research Associate

he global recession of 2008-09 affected many United States also experienced a larger output drop (Martin, advanced economies in similar ways, but several 2013). T commentators have noted striking differences in Many economists argue that German labor market labor market dynamics between the United States and reforms implemented in the 2000s clearly paid off during Germany. These two large, open economies are compara ble the global recession, particularly the combination of less- in many ways and were affected by similar macroeconom ic generous unemployment benefits, wage moderation, and shocks at the same time (Cooley, Ravikumar, and Rupert, incentives to hoard labor. A long-established work pro gram 2012). called Kurzarbeit (literally “short work”) is credited with The table summarizes four macroeconomic indicators helping to smooth Germany’s labor market adjustment for the United States and Germany between the peak and much better than in previous recessions by allowing firms trough of the U.S. recession (2007:Q4–2009:Q2). While to reduce employee hours. This essay provides an overview Germany’s real gross domestic product (GDP) dropped of Kurzarbeit and compares it with similar legislation intro - about 1 percent more than U.S. GDP, Germany’s unem ploy - duced in the United States. ment rate actually fell a bit. In contrast, the U.S. unem ploy - Under Kurzarbeit, the German government compen - ment rate increased by a staggering 4.5 percentage points sates between 60 percent and 67 percent of an employee’s over the same period. And although the labor force partic i- pation rate remained essentially unchanged in both coun - forgone net wages if the employer needs to cut wage costs tries, the U.S. employment-to-population ratio fell markedly and working hours during a downturn. In the meantime, while Germany’s ratio increased by 1.24 percent. In addi - the employee’s contributions toward pensions and health 1 tion to the impact of the recession, one notable difference care plans are met by the Federal Employment Agency. between the two countries is pre-recession GDP per capita Not unlike the U.S. extension of unemployment benefits grew significantly faster in the United States than in during the recent recession, Kurzarbeit was extended from Germany; as in other countries with similar trends, the 6 months to 24 months while simultaneously simplifying the application process.

Macroeconomic Indicators: Germany and the United States

United States Germany Indicator 2007:Q4 2009:Q2 Change* (%) 2007:Q4 2009:Q2 Change* (%) Real GDP (billions of 2005 currency) $13,326 $12,701 –4.69 €601 €568 –5.6 Unemployment rate (%) 4.8 9.3 4.5 8.3 7.9 –0.4 Employment-to-population ratio † (%) 48.4 45.8 –2.6 48.7 49.3 0.6 Labor force participation rate † (%) 50.8 50.5 –0.4 52.9 53.2 0.3

NOTE: *Changes for the unemployment rate, employment-to-population ratio, and labor force participation rate are expressed as percentage-point changes. Changes for real GDP are expressed as the percentage change. †The employment-to-population ratio and labor force participation rate are calcu - lated using resident populations for comparison across countries. SOURCE: Bureau of Economic Analysis, Statistisches Bundesamt, and Haver Analytics. Economic SYNOPSES Federal Reserve Bank of St. Louis 2

Unemployment Rate: Germany and United States Average Annual Hours Worked per Employee: Percent Germany and United States 11 Index: 2007 = 100 Germany 102 10 U.S. 9 100 8

7 98 6

5 96 Germany 4 U.S. 2007 2008 2009 2010 2011 2012 2013 94 NOTE: The shaded area denotes the recent recession as determined 2007 2008 2009 2010 2011 by the National Bureau of Economic Research. SOURCE: OECD. SOURCE: Bureau of Economic Analysis, Statistical O!ce of the European Communities (Eurostat), and Haver Analytics.

It is clear why such programs may be desirable from rently offer the program, which is now under the umbrella the worker’s point of view during a recession, but what are of the Layoff Prevention Act of 2011. 2 Five of these states the advantages for firms? Under the Kurzarbeit frame work, and the District of Columbia authorized work-sharing firms can temporarily adjust the number of working hours programs in 2009, when unemployment spiked. 3 Although for their existing workers (at the so-called intensive mar gin) it is too early to provide sound evidence on the effect of instead of permanently changing the size of the workforce these programs in the United States, several disparities (at the so-called extensive margin). If firms face uncer tainty with respect to the German labor market suggest such a regarding the nature of their difficulties (e.g., whether they program would have different effects in the two countries. are temporary or permanent), adjustments at the intensive margin allow them to retain skilled and experienced work - With more research and given the limits ers instead of facing the cost of immediate dismissals and the potential for additional future costs of hiring and train - of conventional fiscal and monetary ing new personnel if demand increases and they decide to policies in addressing the conse quences expand operations back to previous levels. of jobless recoveries, a U.S. version of The charts provide some evidence of the effect of such Kurzarbeit may provide another option a program at the aggregate level. While average annual hours per worker dropped by 1.72 percent in the United in the policymaker’s toolkit. States between 2007 and 2009, it fell more markedly—by 2.74 percent—in Germany. Moreover, Germany experi enced The German program has a long history. Kurzarbeit is barely noticeable employment losses compared with the widespread, well known, and accepted by both firms and massive layoffs in the United States. Between the reces sion’s workers; as such, it receives strong government support peak and trough, the U.S. employment-to-population ratio and funding. More important to our comparison are the decreased by 2.6 percentage points (from 48.4 to 45.8 differences in philosophy, design, and employment protec - per cent) while it increased by 0.6 percentage points in tion legislation between the two countries that arguably Germany (from 48.7 to 49.3 percent). make it less costly for U.S. firms to lay off workers and If this labor market feature works well in Germany, can easier for U.S. workers to find jobs after layoffs. These dif - it be adopted in other countries as well? One version of a ferences may result in disparate outcomes when the short- short-time work program—called work-sharing—already time work programs are implemented. exists in the United States with the goal of limiting job losses The current understanding of the employment effects during difficult economic times. Twenty-three states cur - of short-time work programs is rather limited: Macro - Economic SYNOPSES Federal Reserve Bank of St. Louis 3

economic analyses suggest some evidence of the net aggre - References gate impact, but more evidence from firm-level studies is Bullard, James. “Some Unpleasant Implications for Unemployment Targeters.” needed to provide an accurate evaluation. Still, with more Speech at the 22nd Annual Hyman P. Minsky Conference, New York, April 17, research and given the limits of conventional fiscal and 2013; http://research.stlouisfed.org/econ/bullard/pdf/Bullard_NYMInsky_2013_Final.pdf . monetary policies in addressing the consequences of job less recoveries (Bullard, 2013) , a U.S. version of Kurzarbeit may Cooley, Thomas F.; Ravikumar, B. and Rupert, Peter. “Bouncing Back from the Great Recession: The United States Versus Europe.” Federal Reserve Bank of provide another option in the policymaker’s toolkit. I St. Louis Economic Synopses , 2012, No. 32, November 9, 2012; http://research.stlouisfed.org/publications/es/12/ES_32_2012-11-09.pdf . Notes Crimmann, Andreas; Wiessner, Frank and Bellmann, Lutz. “The German Work- 1 For a detailed analysis of the cost of the program, see Crimmann, Wiessner, Sharing Scheme: An Instrument for the Crisis.” Condition of Work and Employ - and Bellmann (2010). ment Series No. 25, International Labor Office, 2010; 2 Although short-time compensation programs were permanently authorized as http://www.ilo.int/wcmsp5/groups/public/---ed_protect/---protrav/--- part of the Unemployment Compensation Amendments of 1992, they received travail/documents/publication/wcms_145335.pdf . federal guidance only after passage of the Middle Class Tax Relief and Job Hijzen, Alexander and Venn, Danielle. “The Role of Short-Time Work Schemes Creation Act of 2012. In addition to extending federal unemployment assistance during the 2008-09 Recession.” OECD Social, Employment and Migration through the end of 2012, the act included provisions designed to expand work- Working Papers No. 115, Organisation for Economic Co-operation and sharing as an option within the federal-state unemployment insurance system to Develop ment, January 17, 2011; http://www.oecd-ilibrary.org/docserver/down - provide employers an alternative to layoffs during a business slowdown. load/5kgkd0bbwvxp.pdf?expires=1370879904&id=id&accname=guest&check - 3 Different versions of short-term work exist in 25 of the 33 Organisation for sum=F46488D3505425558476C8E314249FCE . Economic Co-operation and Development (OECD) countries. There is some Martin, Fernando M. “Lessons from the Recent Recession: The Faster They evidence that countries where such programs were used extensively experienced Grow, the Harder They Fall.” Federal Reserve Bank of St. Louis Economic Synopses , smaller increases in unemployment during the global recession; see Hijzen and 2013, No. 10, March 29, 2013; Venn (2011). http://research.stlouisfed.org/publications/es/13/ES_10_2013-03-29.pdf .

Posted on June 14, 2013 Views expressed do not necessarily reflect official positions of the Federal Reserve System.

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